LONDON May 1 Hard currency bond sales by
emerging market borrowers surged in April, with companies
chalking up the highest monthly total since the Federal
Reserve's first hint at stimulus withdrawal last May spooked
Last month's $60 billion tally compares with just over $100
billion sold in the entire first quarter of 2014, even though
Russian firms, usually prolific bond issuers, were absent from
That was down to growing tensions between Moscow and the
West over Russia's annexation of Crimea and its alleged support
for pro-Russia separatists elsewhere in Ukraine.
But other emerging market borrowers and investors appeared
to shrug off the biggest East-West crisis since the Cold War.
Developing sovereigns raised around $16 billion in April,
bringing the year-to-date total to $50 billion, according to
JPMorgan, which runs the most widely used emerging debt indices.
And April issuance by companies of over $44 billion was the
highest monthly total since May 2013, when the U.S. Federal
Reserve's suggestion it might start paring back its monetary
stimulus prompted a wave of selling in emerging markets.
"The situation in Russia is isolated," said Cecile Camilli,
managing director for CEEMEA debt capital markets at Societe
Generale. "We are seeing other regions being active in terms of
issuance - Turkey, Middle Eastern and Eastern European issuers.
"Cover ratios have reached up to five times, which shows
investors have cash to put to work," she said, referring to the
volume of bids relative to the issue size that sellers of new
bonds receive from funds.
These ratios in April hit the highest level in the past five
quarters, JPMorgan analysts noted, for issuers including
junk-rated Zambia, Pakistan, Sri Lanka and Lebanon as well as
investment-grade Romania and Turkey.
Data shows cash returning to emerging markets, which saw
inflows of $25 billion in April, the Institute of International
Finance said this week. Of this, $15 billion went into bonds.
Emerging corporate issuance totals more than $125 billion so
far this year, according to JPMorgan, almost half of the bank's
full-year forecasts, while sovereign bond sales are already
halfway to forecast 2014 volumes.
But rather than a big shift in attitude towards emerging
markets, the bumper issuance may be driven by shrinking yields
on U.S. Treasuries.
U.S. 10-year yields have fallen 35 bps this year as U.S.
economic data has disappointed and events in Ukraine have
fuelled buying of safer assets. Emerging dollar debt is priced
and traded in terms of spread over Treasuries.
Compression in that spread accounts for most of the 3
percent-plus returns on emerging sovereign dollar debt in 2014.
Citi analyst Luis Costa also notes the gradual flattening,
or reduction, in the spread between 10-year and 30-year U.S.
yields as a positive for higher-yielding emerging debt.
"In general, markets have become less scared of a huge
super-spike in U.S. rates that could create chaos," Costa said.
While the U.S. Federal Reserve has kept the pace of stimulus
withdrawal steady, it is expected to start raising rates from
July 2015 which will inevitably push yields higher.
The prospect of a rise in yield is one factor driving
companies and countries to seize any opportunity to sell debt,
said David Hauner, head of EEMEA fixed income and economics
at Bank of America Merrill Lynch.
"The Russia crisis ... has helped to anchor Treasuries. So
people haven't seen the Russia crisis as a reason not to buy
(for example) Croatia," he said. But "U.S. Treasuries could come
under pressure in the second quarter if data is strong."
(Editing by Catherine Evans)